3. Knowing How Much The Money Will Cost

Whether you are going to be using your own money, private lenders or hard money lenders, you will need to figure out what the use of that money is going to cost.

You will need to make assumptions for how long you will need to borrow that money. This depends on how long houses are taking to sell in your area. If they are typically taking 3-6 months to sell and close, assume 6 months or be conservative and go 9 months.

If you need money for the investment, try to finding local hard money lenders. Start a spreadsheet so that you can keep track of their terms and the costs of the loans.

After you complete some successful flips, it will be much easier to start working with private lenders.

4. Finding A House That Will Sell

For a successful house flip, it’s best to find a house that is in an area where houses are selling quickly. The price range of house will probably be what the majority of buyers in your area are able to afford. In my experience, this is typically just below the median home price.

You don’t want to buy a house to flip and find out that the area is mostly rentals and not desireable for homeowners. People just aren’t looking to buy there.

5. Knowing What Repairs Will Be Needed

Always remember to try and set your rehabs apart. Buyers are looking at a lot of houses and they all tend to become a blur after a while. If you do some nice things that the other houses don’t have, they will remember yours and are more likely to either stop looking or come back to it and make an offer.

Focus on curb appeal, bathrooms, kitchens and emphasizing the best aspects of the house. Fancy kitchen backsplashes, new countertops and updated knobs and handles go a long way. Bathroom vanities with granites tops are very inexpensive at the big box stores so it doesn’t make sense to not use them.

A lot of what you use will depend on what the competition has. It doesn’t hurt to view some of the other houses for sale and try to figure out how you can make your house more appealing.

6. Knowing How To Estimate The Cost of Those Repairs

In order to make an informed decision on how much to pay for a house, you will need to know how much repairing and updating the house is going to cost.

The best way to accomplish this if you are not experienced is to bring a contractor to a house that needs a lot of repairs and take notes on the costs of replacing everything. You should find a contractor for your house flips as soon as possible.

Go shopping at Home Depot or Lowes and find inexpensive materials that you can use. Write down the SKU’s and prices so that you can have your contractor use them if you need them.

7. Figuring Out The Maximum You Can Pay

The max you can pay is usually based on the MAO (maximum allowable offer) formula. This formula is where you take 70% of the ARV (after repair value which is the price you can sell the house for after you fix it up) minus the cost of the repairs needed.

So for a house that could sell for $100,000 fixed-up that needs $10,000 in repairs, the most you should pay would be $60,000 ($70,000 [70% of ARV] – $10,000 [cost of repairs]).

The 30% of value removed from the ARV includes your profit, holding and closing costs.

I like to be a little more conservative and go with 65% of ARV minus repairs.

8. Only Offering Less Than The Maximum

Never pay MAO. Always offer less than what you determined to be the maximum you can pay. You need room to negotiate and you never know if you could get it for even cheaper. So start with a lower amount and hopefully you will end up agreeing to a price that is below your max. This will give you more room for profits…or surviving mistakes.

9. Having Vacant House Insurance Before You Close

It’s very important to have insurance on the house. Vacant houses can become targets of vandals and squatters.

You’ll want to get a builder’s risk policy that will cover the house while you are working on it. If you go any other route, make sure to read the fine print and find out for sure if the policy will pay even if something happens while the houes is vacant.

10. Being Ready To Start Work As Soon As You Close

It’s best to have a contractor lined up and the scope of work to be performed determined before you close, if possible. This way you can cut down on your holding costs (which can seriously eat into your profits or even eliminate them – which is no bueno, mi amigo).

11. Having A Solid Contract With Your Independent Contractor

Many problems (I’d even venture to say most problems) during a house flip usually have to do, in one way or another, with the contractor. Whether this is the fault of you, me, or the contractor is a different story.

The best way to avoid problems is to have everything in very detailed writing. Make sure you spell out ‘exactly’ what you want and what you expect. The timeline needs to be determined and the draws need to be determined. I have my draws based on certain milestones and not on time worked. Don’t fall into the trap of giving in to a contractor that demands 50% to start. Please, don’t do that. It’s an invitation to get burned.

Also, spell out how extras and change orders are going to be handled. Require the time to do them and the price must be agreed upon in writing before being done.

Oh and don’t forget the penalty for not finishing on time. Very important.

12. Making Sure You Hold To Your Contract With Your Contractor

There is always a temptation to bend the rules of your contract when it involves confrontation or dealing with a problem. We all want to just take the easy way out and avoid problems. Don’t do this!

If you go back on any terms of your contract, the whole thing can be thrown out the window and ignored. Make sure to enforce it.

13. Keeping From Over-Improving The House

Don’t fall into the over-improvement trap. This is where you start doing things to the house that you would want in your own house.

You are not going to be moving into this house. It is an investment. It’s not something to get emotional about. It’s all about the numbers. Don’t over do it.

Don’t spend $10,000 on new windows for a $65,000 house. Just doesn’t make sense.

14. Finishing The House On Time And Under Budget

You’ve got to stay on top of them and push when people need pushing. Show up on the jobsite unexpected and often. Keep people on their toes and let them know that you expect things to be done on time. The penalty for not finishing the job on time can be a great motivator.

Don’t be a jerk and be unrealistic. If all that is left is the exterior and it rains for a week straight, it can’t be helped. There are times when being realistic is important.

There’s always a delicate balance needed. Don’t be a jerk, but be firm.

15. Thoroughly Cleaning and Staging The House

Nothing is worse than a completely rehabbed house that is filthy. I’m talking about dust everywhere, dirty toilets, scufffed up floors, paint drops everywhere, etc.

These are the things that affect impressions. Sometimes the small things will make a big impact and may give people a negative impression of the house even though the whole thing was remodeled.

Staging a house can make a very huge difference if done right. You want to try and make it so nice that the buyer gets an impression that they are moving up if they buy the house.

Some studies done somewhere by someone (I won’t pretend to remember) showed that houses that had furniture sold faster than vacant houses. Plus, it’s just nice to be able to sit down and really ‘experience’ a house. If there is nowhere to sit, they probably won’t spend as much time at the house.

16. Listing The House Right Away At A Good Price Based On Comps

Don’t be the investor that prices his house based on what he has into it. Just doesn’t make any damn sense. This is also typically the one that refuses to reduce the price and ends up spending way more in holding costs.

Base your selling price on what other similar, nearby properties have sold for recently. Period.

Even if your house is nicer, don’t price it more than the comps, and if you do, don’t go overboard.

If a house has been sitting on the market for a while, people will begin to wonder why.

17. Be Willing To Lower The Price As Needed

This goes along with the last one. If the house isn’t selling, it’s almost always because it is priced too high.

If there is a fault people are finding with the house fix it. If there is a fault that can’t be fixed or you just can’t afford or don’t want to, you should lower the price. Don’t be stubborn.

People lose their shirts all the time all because they are unwilling to lower the price. This happens a lot when people are into the house for far more than they should be. They don’t want to lose a lot of money so they don’t lower the price. Sometimes, you’ve just got to stop the bleeding.

18. Being Willing To Negotiate With Buyers

This one is an extension of the last one. Don’t get angry with buyers wanting to negotiate. It’s going to happen.

The other side of this is when they offer a price you are willing to accept right away. Sometimes it’s best to negotiate something insignificant just so that they can feel that they got the best price they could have. You don’t want them wondering if they could have bought it cheaper. This might present itself after the inspection where they want to negotiate some repairs (which appear during every inspection).

19. Keeping An Eye On What Your Holding Costs Are

If you are not aware of what your investment is costing you as time goes by, you may end up with a horrible surprise when you have it sold and the dust settles.

Always know how much you have into a project and how much it is costing you every day.

20. Keeping The Lawn In Good Shape And The House Clean

This is one a lot of rehabbers tend to get lazy about, yours truly included. It doesn’t take much to go by from time to time and clean up the dead bugs, sweep and vacuum and wipe off counters.

You also don’t want that beautiful new lawn turning brown and dying on you.

21. Only Accepting Offers From Capable Buyers

This one you will get good at as time passes. You will find that certain lenders are a pain in the ass and others are a dream come true. Also, some buyers can also cause you serious grief as well. The ones that go into it making all kinds of demands are better told to take it or leave it sooner than later. Trust me.

22. Making Concessions, But Only Necessary Ones

The other side of the last one is being willing to make concessions to get the deal closed, when necessary.

A perfect example is a house that was taking a long time for us to sell. We ended up finding a buyer and working 2 months to get it closed. At the last minute, the lender informs everyone that the buyer does not qualify for a loan to cover the purchase price. WHAT!!!!

In order to do the deal, we had to knock $8,000 of the price. That was not an easy decision, but one we were willing to make after much deliberation.

Incidentally, the fact that the buyer’s agent even had the nerve to ask if we would lower the price that much impressed us and she has been our selling agent ever since. So there is always something positive that can be gained from a negative situation. You just have to find it.

23. Following Up With The Title Company To Make Sure Things Are Progressing

You’ve got to make sure people are doing what they are supposed to be doing. Someone always needs to be pushing. If you are not and someone else with another closing is, your stuff is likely to be sitting on someone’s desk for a long time.

Call in every several days just to touch base and keep things on track.

24. Checking The Final HUD Settlement Statement Before Going To Close

Before going to closing, make sure to review the HUD1 settlement statement. You want to make sure all the numbers for the closing are correct. You don’t want to be in the middle of a closing only to find out that major mistakes had been made. What’s even worse is if you miss mistakes because your mind is already sort of numb from all of the stress of getting the deal done.

Besides, don’t you want to know as soon as possible how much you will be making?

25. Remember To Cancel The Insurance And Utilities

Don’t do what I’ve done. On several occasions I’ve received notices to renew insurance on properties that we had sold almost a year before. Some policies allow you to receive a refund on policies that are cancelled before the policy expires. Because I had forgotten to cancel the policies,, I probably lost out on at least about a thousand dollars.

26. Taking Notes On What Went Right And What Went Wrong

After your successful house flip, review what you did well and what could use work. Take notes. You should always be working on improving the process so that you can squeeze more profit out of each deal.

27. Spending The Money Wisely

Don’t go spending the money on a fancy car. This is your choice, but you will be much better off putting the money back into your company. Spend a good chunk on marketing to land more deals. Get the snowball rolling.

Follow these steps and you will have a much better chance at having a successful outcome to your house flip.

I can’t think of everything and I’m sure some things have been left out that should be added. Please do me a favor and add what keys you have to successfully flipping houses in the comments. I really appreciate it.

Great post Danny. Love #20. I have seen so many flippers over the years do all this work and 2 weeks later its weeds and tall grass. I commonly would make the rounds on Fridays and mow and clean the yards ready for weekend buyer traffic. Even after you accept an offer its important to keep it dialed in, just in case your deal falls through. Hope all is well in Good Ole SA!

Great post. I was nodding my head as a newbie with only 3 deals under my belt. I’ve seen a lot of these things happen to me and others. Like the utility company saying the power has already been turned on by the buyer and it automatically is terminated for you. But we still kept getting the bill… Thanks, Todd

Great information. I do have a question when using a Private Money Lender. Are you including repair cost, holding cost in the amount you asking for? If the lender is wanting a 5% return on their investment. Are you paying this back on a monthly basis, or pay back the lender when the home sells?

It just depends on the lender and the deal. They want the loan to be a certain percentage of the value of the property. So if repair costs and some holding costs still keep the loan below that percentage they will still do it. Some want you to have skin in the game and will only cover the purchase and some will do some of the repairs.

Payment is also up to the lender. We have some that we make money interest only payments to (this is the norm). Some allow us to just pay back everything when we sell the house.

Obviously, if you could find a lender (or can convince one) to lend purchase and repairs and deferred payments, you will have less problems with cash flow.

If I could add just one more point to your awesome list of tips it would be to always look for keepers while you are flipping. All of the really rich investors I know have rental properties, commercial buildings or land holdings (or all three). I am getting there slowly but surely. I probably flip four properties to each one I keep but there is serious money to be made by holding good assets (especially cash-flowing ones) for the long term. Flipping pays my bills and buys a few toys and vacations but my long-term investments will pay for a nice retirement one day…at least that’s the plan.

I love the long-term strategy of notes, but won’t you always have to be adding new ones, since inevitably a lot of them will either be sold, refinanced and paid off, or amortized out? I can’t figure out how you can be certain your notes will last you well into retirement. Thanks!

Yes, and right now that’s very easy for you to do (locate more properties). But for a retirement strategy, when Melissa and you are old and gray (haha), what if you don’t have the time or energy to go find those deals anymore, or you aren’t even in the States anymore, but off traveling the world?

I’m probably addressing my idea of what retirement is more than yours perhaps, but access to deals would seem to be something that would always have to happen to keep this strategy going.

Just thinking out loud, because again, I love the idea of this strategy, I just don’t know when I’m 75 if I want to have to be worrying about replacing lost income. Hmmm…

At that point I’m sure we will have used the income generated by what we have to diversify into other investments (mostly passive of course). I’m sure we could also find a way to have people find the deals and handle it for us.

Another great post Danny – thanks for taking the time to write it. I have a specific question for you. What do you recommend about he penalty for a contractor not finishing on time? We are about to start work on our first flip and would love to hear what you have to say about that. Thanks!

I usually make the penalty either $50 or $75 per day over the deadline. I’m fair with the amount of time given for the job and let them know that if the weather keeps them from finishing on time, I will take it into consideration.

Some people offer a bonus for completing ahead of schedule. I don’t usually like that because the contractor may tend to count on it and is tempted to cut some corners to get it done ahead of time. Just some thoughts.

Danny, I saw your pics of the “crispy burned” house. Do you also have the after photos? That level of renovation is truly intimidating, even for a somewhat experienced investor. I would love to know what your purchase price was, contractor repairs and the sale price. I think it’s a special talent to be able to envision a diamond in the rough.

I love all the kind of “comprehensive” posts lately. Great stuff. Thanks again for taking the time to work on this blog. I know it was a tough decision to stop and then start again. Just want you to know it’s greatly appreciated.

I’m getting ready to buy my first flipper. Up until now, it has all just been a goal. Now I have the money (50/50 w/ partner) and am starting to get the butterflies about it because I am going to be just about cleaning my savings out and stepping out of my comfort zone to give it a whirl. I’ve been talking to a HM lender and the best im finding right now is about 3 points and 12% interest. Plus I will probably end up covering any closing costs. So say I buy a house ARV 100K and I pick it up for 70% minus repairs. After repaired, it would appear to be selling for 30K profit and me and partner get 15 each. But after looking deeper, its not that simple. The points would cost us about $2,100 and our monthly payment (interest of $500-600 a month). If it took 6 months to sell we would be out of pocket around 4k or 5k a piece w/ closing costs. Then realtors take another 6% ($6k – I hate realtors >.<). Now after house is sold, me and partner profit 5-7k each in 6 months. It doesnt seem like a whole lot for the time and effort, but I might be being scared and trying to talk myself out of it. Is there something I'm missing here?? Am I overthinking? I tend to do that about alot of things…

Why do you have a 50/50 partner if he/she is not putting up the money? Unless that partner is bringing something very special to the table, I wouldn’t want to give up 50% profit.

All of those costs you mentioned are what the tv shows conveniently leave out. This is another reason why I try to get the properties for below 70% of ARV. Don’t forget about property taxes, insurance, rehab overages, new buyer’s closing cost assistance…

I’m not trying to scare you, just trying to make you realize that it can be done safely if you buy cheap enough and you worked really hard to get it fixed, on the market and sold.

The partnership of 50/50 is we are both spending 50% of the money to get into it. Half the closing costs and points and all. We decided to try a 50/50 so that we are taking a lesser risk. Since we havent done any house flipping in the past, If we lost money, it wouldnt be as hard for me to recover by myself if i was taking all the risk. BTW I got my signs FINALLY!!!

I would go into it solo, but it might be better to get my feet wet with some help just in the beginning. Do you not really think this is a good idea?

I am really intrested in this flipping houses thing and i have been doing a lot of research (learning from others mistakes) lol i really love your tips but i would also like to say that taking the time out to get your real estate license (im doing mine online) can be a big investment in itself, concidering you will be taking their cut and pocketing more $$$$! I will be starting my flipps soon wish me luck!!!